The Green Sheet Online Edition

December 09, 2013 • Issue 13:12:01

Virtual currencies and the law – a primer for ISOs

By Adam Atlas
Attorney at Law

Bitcoin buzz: over the course of one week in November 2013, the value of bitcoin against the U.S. dollar increased fivefold, breaking $700 per bitcoin. Is it even legal? The purpose of this article is to put virtual currencies, such as bitcoin in legal context and compare them to traditional payment methods. Hopefully, the information here will help you plan your business strategy vis-�-vis virtual currency.

What is virtual currency?

The U.S. Department of the Treasury, through its Financial Crimes Enforcement Network (FinCEN), divides currencies into "real currency," which is legal tender that circulates and is accepted as a medium of exchange in the country of issuance. Examples of real currencies include the U.S. dollar, British pound sterling, euro and Canadian dollar.

FinCEN defines "virtual currency" as a medium of exchange that operates like a real currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.

Examples of virtual currency include bitcoin (www.bitcoin.org), ripple (www.ripple.com) and ven (www.ven.vc). (A more complete list is at www.moneyservicesbusinesslaw.com.) Think of virtual currency as a kind of electronic monopoly money users agree to value like real currency.

Is virtual currency legal?

There is nothing specifically illegal about the operation or use of a virtual currency � provided that it is done within the parameters of federal and state law. Just like one can buy old coins at rummage sales, individual citizens are generally allowed, under federal law, to buy units of virtual currency.

FinCEN guidelines characterize individuals who buy or sell goods with virtual currency as "users." Federal law doesn't require users of virtual currency to have licenses or registrations. Other participants in virtual currency marketplaces, however, are required to register with FinCEN as money services businesses and may also be required to become licensed in each state that has money transmitter licensing laws. That's about 46 states.

If you are in the business of, for example, transmitting virtual currency from one consumer to another and taking possession of it as an agent of the sender � like a traditional money transmitter � then federal and state law will generally treat you like a money transmitter and require you to be registered and licensed.

State licensing is expensive and time consuming. The regulatory burden of state licensing is so great, that many virtual currency businesses go to other countries, throw in the towel or simply operate illegally � at great risk of prosecution.

Why should I care?

For the moment, virtual currencies are more talk than action. That said, as legal counsel to a number of virtual currency businesses, I believe ISOs must plan for a scenario in which merchants will want ISOs to assist them in accepting payment by bitcoin and other virtual currencies.

This is not necessarily because there will initially be a huge volume of processing through these new networks, but because certain constituencies of merchants will see value in saying they accept virtual currencies; others will see it as a way to boost sales.

ISO time invested in learning how to service merchants' virtual currency needs is time well spent � and could result in revenue to the ISO. What ISOs know better than most virtual currency startups is the necessity and value of sales in any payment network.

Several virtual currency startups believe, sometimes rightly, in the power of online "word of mouth." That kind of promotion will work for a certain younger demographic, but will not get you processing bitcoin on Main Street. Enter the veteran ISO salesperson.

Will I get in trouble for selling virtual currency processing?

Like any processing sales program, you need to make sure that what you are selling is legal. If your processor is a foreign bank aggregating multiple merchant transactions in a single merchant identification number without a license to do so � you know you are selling something a little sketchy.

Similarly, ISOs should require proof from virtual currency processors that what they provide has all the necessary licenses. An ISO must avoid aiding and abetting an illegal business. Just because a virtual currency processor is new doesn't necessarily mean it is noncompliant. Correspondence from legal counsel to the processor may give an ISO comfort regarding the virtual currency processor's status; the same is true for correspondence from regulators that have licensed the entity or told the entity that it doesn't need to be licensed.

Are ISOs right for virtual currency processing sales?

ISOs are more than simple sales organizations � they are merchant educators. Who better to teach (and profit from) virtual currency processing than the same ISO that has handled processing for a given merchant for years already? The ISO is perfectly suited to provide advice on the interplay between real and virtual currency processing.

If only to educate merchants as to what virtual currency is, I think ISOs will generate value in their merchant relationships.

How do I get started?

The best way to become involved in sales of virtual currency processing is to own some virtual currency. Pick one, download a wallet in which you can store it and buy some from a duly licensed provider. Get a feel for what it is and how easily it can be obtained and used. This knowledge is the tip of the iceberg into a growing number of opportunities in virtual currency.

Naturally, you must be careful and know whether the entities you deal with are permitted to operate the businesses they operate. Quiz new providers on the federal and state registration and licensing situation, and ask them if they have anti-money laundering programs. Review merchant sites that use their processing services.

Virtual currency processing is not for everyone � certainly not for those who are unaware of the legal context and requirements.

But knowledge of virtual currency is mandatory for acquiring ISOs so they can see around the corner at what will be one more gadget on the cluttered merchant countertop � real estate that ISOs know better than anyone.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

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